Student Loans and Bankruptcy: Will the Two Soon Go Hand-in-Hand?
By Tracy L. Hirsch
Senator Elizabeth Warren is pushing for a bill that will allow student loans to be discharged in bankruptcy. Here’s a closer look at her ambitious (and somewhat controversial) proposal.
It seems that there are now three things that are certain in this life: death, taxes, and student loans.
Student loans have quickly become the number two reason that people are in over their heads in debt, right after costly medical bills. While medical bills and credit card debt can be wiped out by filing a bankruptcy petition, that’s not the case with student loan debt.
As it stands now, student loans are never discharged in bankruptcy unless someone is so severely disabled that it’s proven that they will never recover, and thus, never be able to work at all. This is considered “undue hardship,” and as you can imagine, most people don’t meet that criteria.
Even if an individual has an illness that causes them to be unemployed for two years, they still have to pay back their student loans. So for all intents and purposes, student loans are not dischargeable in bankruptcy (minus the extremely rare exceptions).
At first glance, taking out student loans for an advanced degree seems like the gateway to a financially stable life. Unfortunately, this isn’t the case for most people.
Last week, Senator Elizabeth Warren (D) proposed that the federal government should pass legislation that would allow people to wipe out their student loan debt through bankruptcy. While some see this as a way-too-generous forgiveness program, others see it as a much-needed solution to an ongoing problem.
In a nutshell, the proposal states that individuals should be able to seek student loan relief through bankruptcy based upon their income. In Congress’s last session, Representative John Katko (R) also proposed a similar bill, which proves that this has turned into a bipartisan issue.
While this plan has many supporters, there’s been quite a bit of pushback regarding how these student loans will be paid off. The controversy lies in the source of the loan repayment, as these debts are proposed to be covered by an educational tax on America’s wealthiest citizens.
Regardless of where one stands on that particular issue, it’s safe to say that most people agree that student loans are an immense burden that often stick around for decades after graduation.
Collectively, Americans owe approximately 1.5 trillion dollars in student loans. (Yes, you read that correctly — trillion with a ‘t.’)
Last year, more than 65% of college seniors graduated with student loan debt, with the average amount borrowed hovering around $30,000. The other 35% of those students (the ones who didn’t graduate with student loans) most likely had full scholarships or financial resources from family.
In the 1970’s and 1980’s, student loans were eligible to be discharged in bankruptcy, but the rules became stricter as time went on, and by the late 1990’s, federal student loans were no longer allowed to be included in bankruptcy petitions. By 2005, private student loans were also excluded as well.
While many graduates make their monthly student loan payments, it’s almost impossible for them to pay off their balance in a reasonable amount of time. When considering the exorbitant interest rates that are inextricably tied to these loans, it’s usually an uphill battle.
As a bankruptcy attorney, all too often I see clients who need to file for bankruptcy because they need relief from other mounting bills — car loans, medical invoices, and the like — in order to pay back their student loan debt.
While bankruptcy reform is one way to change that, looking at why education costs have risen over 200% in the past three decades, is another area that needs to be put under the microscope.
A return on investment is rarely seen with most undergraduate degrees, as the cost of their entire education is often more than an entire year’s salary. While these issues are far more complex than meets the eye, I believe change is on the horizon.
Is bankruptcy reform likely in the near future? It’s a real possibility. In the meantime, even though it’s almost impossible to discharge student loan debt, bankruptcy has still proven to be beneficial for most other debts.
Credit card and medical bills, wage garnishment, judgment liens, car repossessions, and foreclosures are all issues that can be remedied with a bankruptcy petition. That being said, even though student loans can’t be discharged, they can be part of a Chapter 13 repayment plan.
This means that if your loans are included in a Chapter 13, your wages can’t be garnished by the U.S. Department of Education, and you’ll still be making payments to them while in bankruptcy.
It’s important to note, however, that interest will still be accrued while in a bankruptcy plan, and you’ll still have to continue paying your student loan debt after you conclude your bankruptcy plan.
While the bankruptcy guidelines aren’t completely inclusive when it comes to every single type of debt, declaring bankruptcy is still a necessary and fundamental right that’s been provided by the government. It can give people the fresh start that they need — one that they otherwise wouldn’t have if not for the U.S. Bankruptcy Code.
Maybe the time will come, someday soon, when educational debts will no longer impede the financial freedom that so many Americans are seeking. Until then, we’ll focus on the debts that can be overcome.
All the best,
Tracy L. Hirsch
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